” Please, a definition: a hibernation is a covert preparation for a more overt action.”
– Ralph Ellison, Invisible Man, 1952
In harsh climates when food is scarce, bears and some other animals sleep through winter because they use up more energy maintaining their body temperature and in foraging for food than they would receive from eating the food they are able to find. This is also true of businesses now during this pandemic and forced lockdown.
Professionals such as accountants and lawyers who are normally very circumspect, compliant and coy about selling themselves in public, have recently very quickly jumped into the business guru bandwagon by dispensing webinar wisdoms and live-streamed tips to clients and strangers they have never met on how to survive through this unpredictable period that each day is looking leaner and tougher.
Companies are advised to tighten their belts at a time when they are also told that they have a legal and moral duty to pay full salaries to all their staff who are not working and staying at home.
Business owners are exhorted to stay positive and be willing to adapt and innovate. But they must if possible keep everything the way it was so that the situation can and will return smoothly and quickly back to before. As employers they are not allowed to change any job position, working hours and pay. To get staff to accept any of these changes a business owner must first convince them (via Zoom of course) that his plan is good for everyone in the long run and by appealing to their sense of desperation, gratitude or pity.
Like the latest memes such as stay at home to save lives, be responsible by not working or being alone in this together, the advice about the law we have been hearing sums up the paradoxes and dilemmas of Covid-19.
This pandemic is different from all past crises we know, not just because it affects and can harm more people and spread to more places but also because the response it brings out in people is so contradictory and confusing.
We are now dealing with the ‘unknown unknowns’, to use a term coined by ex-US Secretary of Defense Donald Rumsfeld when he was asked about the alleged weapons of mass destruction during the war on Iraq in 2002.
With so much that we don’t know and not knowing even more of what we don’t know, isn’t it better for us to postpone planning or committing too much until we figure things out? Shouldn’t a business be like a bear in the depth of a long dark winter adapt for survival by going into hibernation to conserve energy and resources till when the season is kinder and food becomes more plentiful and easier to find?
Malaysian labour laws only give companies the choice to either continue with terms they have agreed with their staff or lay them off if they cannot afford to keep them. Options such as pay reduction, shorter working hours or unpaid leave are core changes to the terms of employment. To carry out any such cost cutting, companies must first get their employees to agree. A boss, under labour law, has no right to force his workers to take a pay cut or insist that they take unpaid leave.
Covid-19 is a textbook case of commercial frustration. This is a crisis on a dramatic and shocking scale. Countries across the world, on lockdown mode to contain the virus, are creating the conditions for the worst economic downturn since the Great Depression.
In Malaysia employment contracts are at the risk of frustration under section 57(2) of the Contracts Act 1950. Due to restrictions on movement and commercial activities by MCO that have now lasted for 6 weeks and are still continuing with no indication of when these will end or what social distancing laws will there be after that, many employers should now be able to legally say that their contracts with their workers have been frustrated. To be fair, these companies ought to be allowed to treat their employments as ended and no longer valid.
Labour is a special species of contracts where government often steps in in time of crisis on the side of workers. But this time the problem is so much larger in size and repercussions. Tackling it will overwhelm any policy makers in the period ahead unless countries pass laws to freeze contracts and save them from breach. This is what Singapore and Denmark did recently in passing their Covid legislations. Since 2009 Australia has its Fair Work Act that allows the employees to be stood down on no wages when they cannot do useful work due to matters outside the employer’s control such as inclement weather and now Covid-19.
While most companies are making hard decisions about cashflow, income and monthly survival, more of them have reached a point where they must cut staff back to the number they really need in order to protect the jobs of those that stay.
As the country enters further into an indefinite period of lockdown and an uncertain social, financial, commercial, health and logistical aftermath, the logic of hibernation will be harder to ignore.
A clear-headed way out of this quagmire is first for both employer and workers to accept that a situation giving rise to frustration of contract exist now. Next is for both sides to agree in good faith to avoid frustration by allowing the employment contract to hibernate and to stand down the workers so that money, jobs, and relationships can be protected and preserved. By hibernating, companies and staff are in fact agreeing to save the employment from frustration.
Any staff who is willing and able to work remotely or at home should be given freelance assignments and income to sustain himself during hibernation. The rest will need to think of ways to monetize their other skills or hobbies. Companies can only help those who are willing to learn new skills to prepare for life and work after Covid 19. Paying a person just to sit at home without having to work or contribute does not make social or commercial sense even in weird times like this.
This will give the company the time, money and focus it needs to conserve its resources, plan its recovery and transform itself internally for the big changes and opportunities that will certainly come its way when the crisis is over.
Asking staff to sacrifice by taking a pay cut or go on unpaid leave now so that they will have the same pay and job waiting for them is committing to a promise you may be forced to break. Neither does it make sense to pay staff in full for not working or decide now whom to sack or keep when things and situations are so unclear and changing day by day.
“If it is to your advantage, make a forward move; if not, stay where you are. Anger may in time change to happiness, annoyance can revert to joy. But a State that has been destroyed cannot be brought back to life. Hence the enlightened ruler is heedful, and the good general full of caution. This is the way to keep a State at peace and an army intact.”
(19-22, The Art of War, 12)
In our next post we will tell you about HERA – the Hibernation of Employment and Resumption Agreement and the steps to take in hibernating your business and standing down your employees while at the same time providing them with freelance work and alternative income.
Lim Yew Yi and Kerk Boon Leng
Our team at Malaysia Residency is busy (sort of). Since 18 March we have been working away from our nice cosy office due to the MCO (Movement Control Order). We are all encamped and isolated in our homes monitoring our MM2H (Malaysia My Second Home) files, updating clients and answering enquiries from all over the world.
The MM2H Centre has earlier said it would reopen on 30 April. We were informed that although the official counters had shuttered, online applications would still be accepted and processed.
Now with the likelihood of the MCO being further extended beyond April, we are not so sure. Most civil servants have been ordered to stay at home. It now looks more like a case of wait-and-see.
Border controls have tightened. Only returning citizens, permanent residents, foreign diplomats and those with work permits in essential jobs are allowed in.
Foreigners who are married to Malaysian are only allowed to reunite with their spouse if they have a long-term social visit pass (LTSVP) spouse visa. Unless they already have this stamp endorsed on their passport they cannot enter the country even if they have been legally married for 30 years and are able to present a valid marriage certificate.
This is gloomy news. That foreign spouses of Malaysian citizens and those with long-term MM2H residency visa are not permitted to be with their loved and closest ones during such period of crisis and uncertainty when their presence is most needed has become the new normal and lopsided logic in this era of social distancing.
For special cases such as on medical, pregnancy and emotional grounds, appeals can be sent to the Director-General of Immigration at this email address:
Here are the numbers:
Immigration: + 60-0388801555
National Security Council or Majlis Keselamatan Negara (MKN): + 60-0388882010
Our movements may be restricted but our hearts should not be. This is the time to show the world what Malaysia is capable of becoming – an open multiracial and welcoming 21st century developed country.
We strongly advise the government to adopt a more appropriate and compassionate policy. Foreign spouses and MM2H residents should be allowed into Malaysia if they have a family or home here.
This will be an even more powerful brand strategy than any advertisement or slogan Tourism Malaysia could have come up with in 2020.
A. Law in the time of Corona
Extraordinary times are upon us, foretelling a period of massive social, political and economic dislocation and change. Countries around the world have been put on a war footing to combat a virus that is causing the biggest peacetime lockdown and immobilisation of population in living memory.
The economy will surely be a casualty in these unprecedented upheavals. Globally many businesses will be forced to close down making millions of people jobless and destitute in the coming months.
Malaysia’s newly-installed government eager to prop up its popularity with its worried, wearied and physically-restricted masses, has issued statements through the Ministry of Human Resources (MOHR) that companies must not cut staff salaries or retrench workers during the period of Movement Control Order (MCO), which tentatively is now extended by another two weeks to 14 April.
B. Hire and Fire
The law used to give Employers, as a corollary to their entrepreneurial risk-taking, the right to hire or fire workers as they pleased. Such capriciousness and not to mention callous disregard for the welfare of workers were reasons for Karl Marx labelling law as a capitalist tool of oppression and exploitation.
These days in times of greater social enlightenment and media, companies can of course still be free to allocate manpower and resources to maximise profit but they are required by law to have just grounds and genuine reasons before terminating a worker.
The only accepted lawful grounds for termination are misconduct and poor performance.
Under section 20 of the Industrial Relations Act 1967, an employee who finds himself unfairly dismissed by his employer without just cause or excuse, may complain to the Director General of Industrial Relations within 60 days from the date of his termination to get his job back or alternatively be paid compensation for losing his job.
The Government has even gone as far as judicially pre-empting in the MOHR’s website FAQs of 20 March 2020 (‘ the Guidelines’) that staff cannot be terminated on the grounds of ‘frustration’ of employment since the MCO does not involve a long period of disruption to their contractual relationship!
Seriously? Are you kidding me?
So what can Employers and Companies legally do when they are squeezed between continuing costs and zero or disappearing incomes during the MCO and even after?
C. Reducing Hours and Salaries
In clause 23 of the Guidelines, MOHR says that before any company is allowed to lay off staff, it should try to delay or avoid it altogether by first reducing their duties, shortening their work hours, suspending operation or cutting their salaries.
Salary is understandably a vital term. It is an important term binding on every employer who has promised in the contract of employment the remuneration the employee can expect to receive for the job and services he renders to the company.
Workers’ pay is protected by the Employment Act which prohibit companies from making any deduction from monthly salaries except under limited circumstances or for statutory payments such as EPF. Although, interestingly, salary can also be deducted of an employee for time he has stayed away from work due to imprisonment and custodial detention.
A cut in salary would be a crucial change to a key term in the contract of employment that requires the employee’s consent.
Any company contemplating cutting salaries should first discuss the plan with the employees giving them details and reasons for such a move and getting their signed consent. The proposed cut in salaries should be non-discriminatory. It should ideally cut across all ranks and positions by taking into consideration factors such as job scope, amount, length of service and contribution.
No business can be expected to run for long and meet its overheads and costs including the salaries it pays its staff unless it has recurring and sustainable income.
It is socially responsible and admirable of MOHR to exhort and direct on its website and online videos that companies keep their staff and salaries throughout the MCO period.
But in the end it will be the realities of the market and on the ground that force upon employers the hard decision finally to let their workers go.
Technically, a retrenchment is by law only allowed to take place in a situation of redundancy when a company has more staff than it needs to remain profitable and in business.
There are requirements that are laid out in the Employment Act and its regulations ( for employees who are citizens and permanent residents earning less than RM2,000 per month) and provisions under the Code of Conduct for Industrial Harmony 1975 for companies undertaking staff retrenchment to adhere to.
That being said, the Guidelines admit that retrenchment is an employer’s right of prerogative but one that must be undertaken responsibly, in good faith and only as a last resort.
A party to a contract is excused from having to do what he has promised to do for the other, if something terribly big and unexpected turns out making what he has promised to do either impossible or unlawful to carry out. This is termed in law “frustration of contract”.
Given that employment is in essence a contract of supply of labour, it too can be affected by the doctrine of frustration which in Malaysia is found under section 57 of the Contracts Act 1950.
Since by this stage almost everyone agrees that the current Covid-19 pandemic is a global emergency of economy-shattering and society-changing proportion, the idea that employment like other types of contracts of supply can be frustrated by MCO is not a remote or fanciful one.
Not every company can operate away from its physical premises or location by ordering its employees to work from home. In dire times like this telling companies especially most SMEs to obey the MCO and the Guidelines is like sending a trainee Taliban on a suicide mission. For a company to give all their staff a one month or more paid staycation at a time of zero income and running fixed costs is committing financial harakiri.
It is respectfully proposed here that the current types of work or occupation (other than those classified by law as critical and essential industries) can be grouped under 3 rough categories:
1) Location bound – these are work that requires employees to be at the office or factory site to carry it out. Working remotely or at home is physically and conceptually either impossible or out of the question for the forseeable future
2) Location dependent – these are work that can potentially be done from home but physically and conceptually requires technological, mental and institutional changes to happen first in order to do so.
3) Location flexible – these professions and jobs do not require a specific site and can be performed on a lap top anywhere including in a cafe or on the beach at the sound of lapping waves.
A reasonable case can be made that employers in categories ( 1) and ( 2) can justifiably treat their staff’s employment as frustrated if their work premises are forced by MCO to close – an act of government that clearly is beyond the employer’s control or calculation that affects business radically or fundamentally.
This can happen not just during the MCO when it is both impossible and unlawful to work, but also after. The end of MCO does not mean the end of the Covid-19 pandemic. When MCO is lifted, other forms of legal, social or health restrictions could still be in place then rendering the contracts of employment radically and unexpectedly different from what they were meant to be originally.
There are already a number of case law in both Malaysia and especially in England supporting frustration of employment under exonerating circumstances.
The Appeal Tribunal in the case of Spencer v Paragon Wallpapers (1977) allowed the frustration of employment contract of an employee on the grounds he wasn’t able to report back to work in a mill north of Manchester due to prolonged illness at a time when his company faced with increased customers orders was in urgent need of his service. In a careful judgement read out by Phillips J. the English court has this to say:
” It is obviously a hardship to any employee to be dismissed when he has been absent due to illness for only a few weeks …Every case depends on its own circumstances. The basic question which has to be determined in every case is whether, in all circumstances, the employer can be expected to wait any longer and, if so, how much longer?”
This too is the question a lot of SMEs are asking, especially after they are informed that under the Government’s recently announced RM250 billion Economic Stimulus package only RM600 per month will be paid for three months to company for each staff earning a monthly salary of less than RM4,000 that it retains on full salary and not retrench.
by Kerk Boon Leng & Rean Chang
From its origins in the American colonies in 17th century New England when taxpaying folks would gather in town halls to listen and talk to their politicians who would then bring up their views in parliament, the terms “town hall meeting” or “town halls” have expanded to describe any present day gathering of people in a hall or similar large community space to discuss issues with their elected leaders.
Of late the practice of holding informal meetings by groups of (usually disgruntled) residents of strata buildings under the guise of “town halls” is gaining some popularity and traction. Partly because as an after-work or weekend free-for-all event, residents can boldly and in the open pressure the invited committee members into answering their ad lib questions without the formalities, restrictions and decorum required by an EGM.
Not surprisingly, the committee of Joint Management Body (JMB) and Management Corporation (MC) are rather cautious about encouraging or attending these town hall meetings. They now ask whether such meetings should be allowed to be held using the facilities of the common property to discuss building matters without the approval of the committee beforehand.
DUTIES AND POWERS OF COMMITTEE
While we may applaud the effort and concern of residents in organising these democratic forums, they appear at odds with the duties and powers given to the committee under the law and seem to side step the procedures for meetings and dialogues spelt out in the Strata Management Act (“SMA”).
According to sections 21 and 22 of the SMA, the Committee acting on behalf of JMB or MC and vested with the duties and powers of overall management and control of the building and common property and of enforcing its by- laws (house rules), have the legal right to approve or impose condition on the use of the common property by residents including for town hall meetings.
The Committee, under the standard by-laws (section 4 of the Third Schedule) is charged with the duties and powers to “control, manage and administer” the common property for the “benefit of all the proprietors” except that it may in writing grant exclusive use to any proprietor on suitable terms.
RESIDENTS RIGHT OF DIALOGUE WITH COMMITTEE
Committee members are merely proprietors who are nominated by other proprietors to act on behalf of the JMB or MC, with honesty and without any pay or salary. In carrying out their duties, the Committee members are by no means acting as “representatives” of the proprietors in the senatorial sense so as to be answerable to them as constituents. They are not obliged to provide answers every time they get any question from the residents nor must they under the law turn up for the so-called town hall meetings to explain things each time they are invited to attend.
In fact, the Committee is by law obliged to only hold one general meeting a year with proprietors. This event is called an AGM. The rest of the time the law says that they must hold their own committee meetings which they must do at least once every two months. Residents can attend these committee meetings as observers but they must ask for permission first from the Chairman.
If more than one general meeting is needed, proprietors must call for it by following the strict procedures laid down under the law. These ad hoc additional meetings are called Extraordinary General Meetings (EGM).
Therefore, as the SMA has already made provisions for general meetings of residents with the Committee, the holding of “town-hall meetings” has really no basis under strata management law. In fact, set against the spirit of promoting harmonious community living as envisaged and espoused by Malaysia’s strata management laws, Town Hall meetings may end up serving just the opposite purpose.
Kerk Boon Leng
Malaysia has recently come out with guidelines to regulate the renting of Short-Term Residential Accommodations (STRA) on digital platforms.
Among those platforms the most popular and successful is Airbnb, a company founded in 2008 by two unemployed designers, Brian Chesky and Joe Gebbia who rented out air bed in their flat in San Francisco to supplement their incomes. Up to today 500 million stays have been booked through Airbnb and now each night in more than 100,000 cities around the world 2m people sleep in an airbnb.
Hotels in Malaysia, once known for selling some of the cheapest five-star rooms in Asia, have complained that STRA are steadily stealing their guests and causing prices and profits to fall. At the same time, management of condos argue that allowing owners to turn apartments into a hotel creates nuisance to residents and spoils the spirit of community and neighbourliness.
The truth is most STRA in Malaysia are not places where guests get to stay with locals in their spare room, enjoy a cooked breakfast and in the evening watch netflix with the hosts’ children before snuggling up in bed surrounded by homey appurtenances. Most if not all are actually properties bought and furnished by their owners for investment or with the view of turning them into short-term rented accommodations to pay for the mortgage.
If you are a STRA owner, here are some things you should think about before the new law comes into effect:
Set up a legal entity
Set up a legal entity such as a private company (Sdn Bhd) or limited liability partnership (PLT) for the STRA business. Both Sdn Bhd and PLT enjoy lower corporate tax than you as a human person. Besides all your business related expenses like advertising, cleaning, petrol, meals and monthly data plan can be deducted from tax.
PLT is cheaper and easier to form and maintain compared to Sdn Bhd as there are no secretarial or audit fees to pay. The only thing is that you need at least two local partners to form a PLT.
Unless the profits from the business touch RM500,000 a year or as a foreigner you are not allowed to form a PLT, it is better to use PLT than Sdn Bhd as your entity.
If the law later prevents you as a non-Malaysian from running STRA then forming a Sdn Bhd with 51% local shareholding may be the way to go.
From there on the entity will run the STRA business while you as the owner of the property be the landlord.
Create a Tenancy
After the legal entity is formed you must as the owner and landlord of the property prepare a tenancy agreement to rent it out to that legal entity to operate the STRA business on the premises. The rent under such tenancy can be fixed at a modest sum to only cover bank interest and building service charges so that the bulk of profits is shifted over to the STRA entity to pay a lower corporate tax.
Read the Building Bye-Laws
Talk to the Building Management and check the house rules (now called Bye-Laws) to make sure you are allowed to turn your property into STRA. Even if you can, you need to comply with the rest of the bye-laws especially regarding access cards, parking, noise and keeping of pets.
Check if you need to pay Tourism Tax. The government has made three changes this year to its decision on how much and who should pay this tax. The official website has not been updated but it seems that only foreign tourists need to pay RM10 per room for each night they stay in a STRA that has more than 4 rooms.
‘The price of monopoly is upon every occasion the highest which can be got…The one upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give…”
Adam Smith, The Wealth of Nations (1776)
Tenaga Nasional Berhad or TNB, once called National Electricity Board (NEB) is the country’s biggest and sole supplier of electricity.
As a government-gifted monopoly backed by parliament-made laws protective of its economic interests, TNB has over the years grown profitable, powerful and technologically advanced. Recently the public’s acceptance of TNB as a necessary behemoth has turned into open hostility and even disdain as more consumers have come out accusing TNB of overcharging and high-handedness.
Consumers who find their home or factory power supplies cut and court actions taken against them by TNB for stealing electricity through meter tampering are especially unhappy and aggrieved.
These consumers are slapped with debilitating (and sometimes multiple) court summonses by TNB. The claims for such “loss of revenue” are usually punitive and sometimes for sums of money far exceeding what most consumers are capable of benefitting from their alleged transgression.
A consumer when sued by TNB for meter tampering is like a soccer team that enters a match with a pre-existing 1-0 score at kick-off in favour of the rival.
Much of the apparent unfairness is due to the way the courts have interpreted the abstruse provisions of the Electricity Supply Act 1990 – a statute specially enacted for the benefit of TNB’s privatization.
Recently the judicial tide seems to be turning in favor of consumer rights over the unrestrained free hands of corporate monopoly.
In a first ever decision, the Court of Appeal in Putrajaya stunningly slashed TNB’s claim against a customer for tampering with the power meters in its plastic making factory in Johor Bahru.***
TNB’s claim for RM1.1 million of loss revenue from tampering was dramatically reduced by the court to just RM28,000 – a reduction of over 97% !
The appeal court’s panel of three learned judges unanimously sent a strong signal that TNB can no longer simply claim any unreasonably huge amount it wants from the consumer based on the previous logic of the courts that a thief who has stolen has no right to question but, as punishment, must merely accept whatever amount the victim has estimated to be his loss.
Now the Court of Appeal says TNB to be sure can still claim the lost income from meter tampering by using an estimate but this estimate must not only be fair and reasonable. It must also be mathematically calculable and capable of standing in the face of the facts.
Lim Yew Yi , LLB (Malaya), Advocate and Solicitor
*** The case of Tan Kwee Siang v Tenaga Nasional Berhad, decision of the Court of Appeal was delivered on 23 May 2019. Kerk & Partners acted for the appellant Tan Kwee Siang. The case is at the time of this article unreported
Malaysia has just announced it will pull out of the Rome Statute.
The Rome Statute (not to be confused with the Treaty of Rome that gave birth to the European Union) is an international treaty that aims to punish powerful individuals who can get away with killing and murder on a country scale because the laws of the land they are in will not or cannot bring them to justice.
Fresh with memories of two of the largest attrocities since World War II that had taken place in Bosnia (1992) and Rwanda (1994), the nations of the world met in Rome in 1998 to hammer out a document that in 2002 set up the International Criminal Court (ICC) in the Hague, the stately and sedate town in Holland that is home to the Dutch parliament and also the International Court of Justice.
The ICC has the power to investigate, charge and put on trial powerful people who commit terrible and large scale killings of groups of human beings in cases of genocide, war crimes and other international crimes of aggression.
Malaysia now says it does not want to be part of ICC although it earlier said it would join.
Bowing again to popular sentiments Malaysia has back pedalled and gone against the global current like it did a few months ago by reneging on its promise to stamp out racial discrimination and abolish the death penalty.
Mass ignorance, misleading academics and mischievous politicians have won the day once again in Malaysia.
Measured by gini index, Malaysia is now Asia’s most unequal society ( more than even famously unfair countries like India and China).
The latest model BMWs you spotted in BSC, non-halal 12-course dinners and the lavish lifestyles of denizens of Damansara are an alien world apart from the majority of citizens in the Klang Valley : families of despatch riders, supermarket cashiers and lowly paid government servants returning home to their squalid flats with many large mouths to feed.
Ever since moving into KL’s urban space in increasing numbers in the 1960s and 1970s the Malays (unlike the crowd-loving Chinese and Indians) have never felt totally at home in the city.
Cut off from the security and support of their kins and kinds in the Kampongs the Malays suffer from what the French sociologists termed Anomie and what Germans called Angst.
Poverty, cultural disconnect, urban tension and the mental walls imposed by a Government-sponsored religion are potent ingredients for an incendiary social cocktail.
Understanding their pain and our compassion and kindness to one another is what our country needs now.
Caring for our poor, dispossessed and hungry no matter what race they are or what God they believe in is what truly matters. This is what will hopefully one day make Malaysia fair, multicultural and more equal.
Lately Malaysians have been spiraling into a vicious quarrel about whether this country should finally sign up to its United Nations obligations under The International Convention on the Elimination of All Forms of Racial Discrimination (ICERD). Bizarrely but not so surprisingly, Malaysia along with North Korea and Myanmar are the only noteworthy nations left in the world that haven’t signed.
ICERD is just another aspirational announcement by governments around the world to each other on their lofty intentions about vague and vogueish subjects like world peace, stopping climate change and freeing Palestine. These are not things for us common folks to worry about or fight each other for.
Plainly in such times of mass pain, hunger and ignorance, ICERD is absurd.
Kerk Boon Leng
Looking at the lifestyle outlets sprouting up in shops and malls these days gives people the impression that franchising is the easiest way to start a business. With planning, knowledge and of course money, it can be.
Franchising is when a business owner gives you the right to use his brand, product, business system to operate your business in return for payment.
A. The Basic Questions
Does the food fad you saw recently in a Taipei night market or latest fashion brand in Milan’s Quad d’Oro fit the tastebuds of Cheras or dress sense of Damansara?
Franchise is a unique business concept. It is not a buyer-seller relationship but a comprehensive and inter-dependent relationship between you (franchisee) and the owner (franchisor). Are you ready for a relationship?
The business you are going to run is spelt out in thick and complex legal documents : disclosure document, operation manual, training manual and the franchise agreement. Do you know what you are getting yourself into ?
B. Franchise or Licence?
Unlike overseas, in Malaysia franchising is a regulated business that is monitored under the Franchise Act. As long as the business is operated using a franchise system, the franchisor must register the franchise before it can be sold to you. If not, any agreement you sign for the franchise is not valid and both parties would be committing an offence under the law.
Documents such as the franchise agreement, disclosure documents and the financial report of the franchise must be submitted to the franchise registry every year. The law also spells out the duties and responsibilities of the franchisor and franchisee owe to each other.
If you choose a licence instead, parties have the freedom to negotiate the terms they wish but are then exposed to the risks of unequal skills, bargaining positions and vagaries of the marketplace.
The franchisor is by law required to give you a copy of the franchise agreement and disclosure documents at least ten days before the signing of the franchise agreement.
In licencing, you must rely on information given to you by the Licensor or revealed by company search, CTOS search or due diligence performed by your lawyer.
It is normally hard to negotiate terms of the franchise with the franchisor. The operation manual and terms in the franchise agreement are usually uniform across all franchise outlets.
A license agreement on the other hand is more flexible and can be changed to tailor-suit the licensee.
The franchisor controls how the franchise business is being run via the operation manual and the franchise agreement.
Under sections 26 and 27 of the Franchise Act you must keep the confidential information obtained from the franchise secure and not to operate a business similar to the franchise at least two years from the termination of the franchise agreement.
The minimum period for a franchise is five years [Section 25 of the Franchise Act]. Depending on the kind of business this period can sometimes be longer.
There is no minimum period for a license. It is entirely up to the parties how short or long they want the license to be.
C. Important terms in a Franchise
All terms in the franchise that you agree with the owner must be set down in writing and signed. The important ones are:
Operation (Management and Training)
This is the heart and soul of the franchise. Understanding the how, what and who of the franchise is not just good for business, it is survival.
The franchise gives you exclusive rights to a geographic area. No competitor franchisee is allowed to set up shop in your exclusive zone.
As franchisee, you are authorised to use the trademarks, the recipe, copyright materials of the franchise. In some cases, the franchisor will set some limits as to their use.
Cooling off Period
You can still change your mind about going into the franchise within seven (7) days after signing the franchise agreement. By relying on the cooling off period clause you can terminate at this point but you would need to pay all the costs incurred to date.
This is the price you need to pay for the franchise. The main fees are the royalties and marketing fees.
Third party suppliers
As franchisee you are only allowed to get your goods and services for the business from certain suppliers nominated by the franchisor. You can be in breach of your franchise if you buy your goods or services from parties outside of the franchisor’s list of suppliers.
At the end of the franchise period as long as you have complied with all the terms, you are entitled to renew the franchise by giving six months notice in writing to the franchisor.
If the franchisor decides not to renew the franchise he must compensate you either by paying you a reasonable sum or buying back the franchise from you
A franchise cannot be terminated for the first five years unless both parties agree mutually to cancel or if the cancellation is by court order.
D. Getting Started
You must register yourself as a franchisee within fourteen days after you signed the franchise agreement (Section 6B of the Franchise Act).
By regularly reviewing the operation of the franchise it will help you implement new operation system and marketing plan more effectively.
As franchisee you must run the business properly according to the operation and training manuals and ensure that all the staff are properly trained.
It is good practice to keep the franchisor informed about the business with suggestions and feedback. Communication is important in building a good franchise relationship.
In exchange for payment of fee and royalty, the franchise owner is obliged by law to assist you as franchisee in making your franchise business a success.
Andrew Yoon, Barrister-at-Law (Middle Temple)